The Pension Credit is the next stage in the Government's pension reform programme. It will be introduced across Great Britain in October 2003 at a cost of approximately £2 billion per year. It will provide a guaranteed income for all pensioners and a 'reward' for those with small-scale savings and second incomes. Through the Credit, the Government aims not only to target pensioner poverty but also to increase the incentives to save for future generations. It is accompanied by changes to the way capital is treated in the Minimum Income Guarantee (MIG). This Report sets out the findings of our inquiry into the Credit's aims and into the details of its regulation and administration.
From the evidence we have received, we conclude that the Pension Credit has the potential to go some considerable way toward achieving the aims set down for it by the Government, especially by providing an immediate boost to pensioner incomes. It will ensure that most pensioners will be better off as a result of having saved for their retirement, compared to those who have not. This is not true under the current system, where many pensioners with some second income feel penalised for having saved as they have the same final weekly income as those who have not, owing to the operation of the MIG. The system of assessing entitlement to the Credit, especially the use of five-year assessment periods, should also bring many benefits.
However, in our Report we raise a number of specific concerns about both the operation and the role of the Pension Credit. We urge the Government, subject to affordability, to alter the rules governing the calculation of entitlement to the Credit in order to allow all second income to be rewarded, not just that above the level of the full Basic State Pension. This would ensure that it 'always pays to save'. We also recommend that the disregard for small amounts of weekly earnings be increased, to encourage continued participation in the labour market. The Credit will be administered by the new Pensions Service (an executive agency of the DWP) and we are concerned that it may be unable to cope adequately with the demands of managing a benefit involving the means-testing of over five million pensioners. We stress, in particular, the necessity of the Government ensuring high levels of take-up amongst those eligible for the Credit, if it is to be considered a success; a major challenge for the fledgling agency.
The long-term cost of the Credit and the numbers of pensioners entitled both depend crucially on the future uprating of the Credit's value - both the guaranteed minimum income level and the level of income above which second income is rewarded. So far the Government has only produced three possible uprating scenarios for the uprating of the Credit, beyond 2006, with widely different implications for future cost and coverage. We strongly believe that the Government should reveal its long-term aspiration for the uprating of the Credit to allow greater certainty for all those involved in the long-term planning necessary for pension provision.
Looking at the Government's pensions strategy overall, we question how the Credit will interact with other policies already announced and whether it is, in fact, too complicated a measure to have a significant impact upon future saving behaviour. We are especially concerned that the Pension Credit appears to leave little, if any, role for the State Second Pension. As it is currently proposed, a person could work all their life, contributing to their second pension, and when they retire still be in receipt of means-tested benefit, undermining earlier Government aspirations. We urge the DWP to clarify the role of the State Second Pension as soon as possible.
At the time of this Report being published, the State Pension Credit Bill is passing through its legislative stages in Parliament. We hope that this Report will assist Members of both Houses during their debates on the Bill, as well as those administering it in the longer-term.